Headspace and their quest to deliver shared value
Headspace fascinates me. The company which provides a meditation app, was founded by a monk (Andy Puddicombe) and a London advertising exec (Rich Pearson) back in 2012 and now has 62 million users in 190 countries. They’ve partnered with massive organisations like Nike and the La Lakers as well as individuals like John Legend. They have raised over $215 million from investors and have launched new services in sectors from sleep to digital therapeutics to media production.
But what fascinates me about Headspace is not the dollars they’ve raised or the growth they’ve captured. It’s their role as a shared value organisation. A shared value organisation - a rephrasing from Reimagining Capitalism by Rebecca Henderson - focuses equally on delivering positive social value and financial value to shareholders. Many scholars, including Henderson, believe shared value organisations are the best hope for us to tackle the biggest problems we face whilst progressing as a society.
The Headspace mission is admirable; “improving the health and happiness of the world”, and their pursuit of this mission as a for-profit, technology company, assures their role as a shared value organisation. Given their success to date and the trends in mental health and wellbeing, there is no doubt that they have the potential to be one of the most impactful and financially successful companies in the world.
But, they are at a critical juncture. The decisions they make now will determine their fate.
How have they done so far?
So far, they’ve done a great job at creating shared value - both social and financial.
On the social value side, they have made mindfulness accessible for tens of millions of people around the world and have proven the impact it can have on people’s quality of life. It’s no secret that our mental health and wellbeing is in decline, and Headspace is one of the few companies actually fighting to keep us mentally healthy. With strong partnerships with amazing organisations (LA Lakers, Nike, Apple, Snap) and individuals (John Legend) they’ve normalised mindfulness and have even made it cool. They’ve launched Headspace Sleep which helps people to get better rest, a key part of overall health and wellbeing. Headspace Health - their digital health subsidiary - focuses on using mindfulness and other Headspace services as a part of digital medicine. All round, this has had a huge impact for Headspace users by reducing stress, anxiety and improving their mental wellbeing. The studies exist to prove it.
On the financial value side of the equation, by all external measures, they seem to be smashing it. They now have over 2 million paid subscribers - which at an average annual subscription of $70 equates to ~$140m in Annual Recurring Revenue. They have also raised over $215m from investors (more than $100m of which came in 2020), a positive indication for their growth and financial performance.
The foundations for Headspace to deliver future financial value have also been laid, seen by the how they’ve developed their most valuable asset, the Headspace brand.
Why is the Headspace brand so valuable?
If you’ve ever tried Headspace, you’ll know how calming an experience it is. You put in your headphones, sit down, close your eyes and allow the soothing voice of Andy (the voice of Headspace) to flow into your ears as he tells you to take some deep breaths and let go of your worries. The exercises are warm and comforting. He tells you to love yourself, that you are enough and that everything will be OK. What other company offers this level of assurance and comfort to its users? Their role as an emotional support to users builds the type of associations between Headspace and the user which other brands can only envy.
Connecting with the same voice in your ears every day, allows you to create a relationship, almost a friendship, with Andy - and subsequently Headspace. We naturally connect with other individuals and build relationships with them - think of how well you feel you know your favourite podcast host. This is especially true, when the individual appears to care about our happiness as much as Andy does. This deepens our relationship with the Headspace brand. We like Andy. Andy is Headspace. Therefore, we like Headspace.
Very few brands in the world can develop this sort of connection with their users. It’s almost religious. I don’t believe in God anymore and at times of trouble (when I previously would have prayed) I now open the Headspace app and do a mindfulness session. I know I’m not the only one doing this….
This brand is a powerful asset for Headspace and one which can generate a HUGE amount of future shareholder value for them..., as long as they don’t destroy it (more on that later).
So they’ve been incredibly successful so far, but are cracks starting to appear in their pursuit of shared value?
If we take a look behind the curtains, analyse the background of Headspace, it’s investors and it’s recent actions, we can see the trajectory that they are now on. This trajectory worries me.
Most companies find it easy to remain mission driven in their early days. Mainly because that’s all they have to drive them - financial returns to shareholders are negligible. However, as companies mature and take on more investment, the external demands on financial performance grow. Their investors now start demanding certain levels of growth and improvements in profitability - both necessary for a successful exit (when the investor gets paid out!). I fear this is starting to happen at Headspace and it’s driving them away from delivering social value.
The evidence can be seen in their strategic shifts and personnel changes. But first, let’s look at who their investors are and get an understanding of their incentives.
One of their biggest investor is Blisce, a growth capital VC firm who claim to invest in “purpose driven consumer companies”. However, if you take a look at their portfolio, their is little evidence of such “purpose” - I wouldn't exactly call Casper (a D2C mattress provider) a purpose driven company. One of their other major investors is Spectrum Equity, a Private Equity fund. Both of these firms, as well as their other investors, will be demanding improved financial performance and this will impact Headspace’s strategic decisions.
Don’t get me wrong, there is nothing inherently wrong with this. In fact, it’s what we want from shared value organisations. However, my concern is that the shouts for financial performance in the boardroom may start to drown out the Headspace mission, and shareholder returns may be prioritised over social purpose.
The signs that they are chasing growth and financial performance are already clear to see.
Changes in Leadership
As of October 2020, neither of their founders are in operational roles in the company. Their Founder and Former CEO Rich Pearson was replaced as CEO by CeCe Morgan who before Headspace, spent 13 years at Intuit - a large B2B software provider. This is a clear sign of the boards desire to drive financial returns.
Shifting to B2B.
B2B offers the temptation of big contracts with fat margins. The launch of headspace for work is their attempt to pursue such attractive revenue pools. Is there anything wrong with this? No. Well, not necessarily.
As long as it doesn’t cause conflict with their social purpose. Despite what they may say, the main incentive for a business is still to get the most productivity from their workforce. Although Headspace is focused on reducing stress and increasing focus of employees, it needs to be careful that it puts its users ahead of those paying for the service! Anyone familiar with the US healthcare system knows the perils of such a dynamic.
3. Launching non-core services
Headspace recently launched Headspace Move, a feature in their app that allows users to get moving each day through video exercises with personal trainers. Although it does align with their social mission, you have to question whether this where they should be focusing their resources. This is a move into a non-core service and a saturated market - can they really do this better than any of the other 1,000 fitness apps?
They’ve also launched Headspace Studio, focused on creating and distributing mindful living content. This move fascinates me. There is huge opportunity for them to increase their reach by creating content that delivers their message of mindfulness and that can be distributed broadly. However, the risk here is that the content they create may actually be in conflict with their core brand message.
When recently listening to Radio Headspace (a daily podcast by Andy Puddicombe) I heard him introduce the latest Headspace Studio production, created by Yes Theory - a group of content creators focused on documenting their crazy experiences. I have nothing against Yes Theory, they are great guys with a powerful message and they create super content. But I found myself struggling to understand how they fit in with the Headspace brand. When I think of Headspace, I think of calmness, kindness, empathy and caring. Not some cool guys running around the world doing crazy stunts.
“Headspace do NOT want to be a sofa-bed”
Although Headspace need to test out new markets and products, if it’s too far from their core brand identity, they risk destroying their greatest asset, their brand.
This is due to the “Jack of All Trades” heuristic i.e., they cant be good at everything. If they try to do lots of things in different areas, people will perceive them as only OK at everything. Don’t believe me? What do you think of when you hear “sofa-bed”? You probably think of something that is not a great sofa and also not much of a bed…. Headspace do NOT want to be a sofa-bed.
None of these strategic moves on their own are fatal. However, pursuit of short term growth by adding non core services or pursuing new B2B channels, puts their brand at risk and may make it tricky to stick to their role as a shared value organisation.
The big question facing Headspace
Headspace faces a tough startegic question; How do they find the growth needed to deliver returns to shareholders whilst staying true to their mission of social value?
Finding the right answer will be the difference between Headspace as one of the most impactful and successful companies of our generation and it becoming just another tech company, chasing quarterly growth and delivering little social value.
The right answer does exist. It will however, require some shifts in their strategy and a recommitment to their mission.
For financial value, they are in a transitional phase and need to focus on some core strategic initiatives: (1) creating more value for existing users, (2) expanding their market within the scope of their mission and (3) strengthening their two strategic powers (brand and economies of scale):
1. Create more value for existing users
They can do this by focusing on their power users and offering them additional services to stop them “graduating out” of the app aswell as expanding the mediums through which a user can interact with the calm and kind brand of Headspace. This will improve retention and also allow them to increase the ARPU. Here are some ideas for how Headspace can increase value to existing users:
Coaching and mentorship
After practising mindfulness for a while, most people either hit roadblocks or their progress just flattens off. I can’t see Headspace’s data but I would bet this is a huge issue for them. To help people get over these humps, Headspace could offer coaching on mindfulness.
Physical Locations
The world can be pretty crazy. How good would it be if there was a place to go to unwind from it all (other than our local bar). Imagine a Headspace Gym of sorts, somewhere you can go, chill out, practice some mindfulness and gain a sense of calmness. I would go to this! I’m sure many others would too.
Mental Strength Training
A lot of mental health services are currently focused on helping people having a bad time. It’s the equivalent of an exercise program helping overweight people get back to a healthy weight. This is definitely needed, but imagine if this is all physical exercise was used for. Imagine if there was nothing to help people interested in getting into GREAT physical shape. There is a huge opportunity for this to exist for mental fitness. Someone may not have any issues with stress or anxiety but might want to become the Arnold Schwarzeneger of mental fitness. Someone who has incredible mental endurance, clear thought and endless empathy. Headspace could help people looking to pursue such goals and I think it would be incredibly interesting for them to do so.
I pay almost $2,000 a year on my gym membership for physical exercise. I am willing to pay a lot more than the current $70 / year for mental exercise. Headspace just need to give me the option to do so! This will create significant financial value for them as they increase customer LTV and will also have a deliver significant social value.
2. Expand their market within the scope of their mission
They should look to expand into new markets as this will deliver financial growth and holds potential for increased social value. They must however, take great care to do so within the scope of their mission, so as not to dilute their brand. This means staying focused on mental wellbeing and happiness. There are two markets I believe have huge potential for Headspace.
Headspace Health for Therapeutics
They are already working on this and they should TREBLE down. The Mental Health Therapeutics market is forecast to have huge growth and Headspace are in a great position to capitalise on this. If I was the CEO of Headspace, I’d be committing a lot of investment dollars to Headspace Health.
Building Community
society is becoming increasingly fractured and lonely. There is an urgent need for a product or service that will bring us together, ideally in real life, to meet people, allow us to create social connections and to develop a sense of purpose. So far, there is no social element and it’s not yet clear to me what a service in this space may look like, but it;s a huge opportunity and if they don’t take it, someone else will.
3. Focus on building their two strategic powers:
Brand: The Headspace brand is associated with a sense of calm, kindness, empathy and caring. Not many brands other brands can offer this. Building on this brand over the years will give them the platform to launch new services (like those mentioned above) and increase the price for what they provide. They must avoid brand dilution through things like exercise and be VERY careful with the Headspace Studio.
Economies of scale: As one of the two largest mindfulness apps on the market, Headspace have a scale advantage versus other smaller competitors. This scale allows Headspace to pursue initiatives that smaller companies couldn’t dream of becuase when they split the cost over a paying user base of 2million people, the per user costs become very small. They should use this scale to continue to create new content (and more importantly services) for their users at low cost. Over time, this will become a vital strategic power (don’t believe me, look at Netflix), allowing them to create more financial and social value.
Outside of these strategic initiatives, they MUST stay focused on their mission to improve the health and happiness of the world and remain committed to creating shared value. This means attracting the right talent and filling their exec team, board and cap table with people committed to long term social impact.
It takes real courage to stick to this mission as they grow and external pressure for financial returns grow.
But the world does not need another home fitness app. It does need a company that cares deeply and genuinely about the happiness of its customers - and acts accordingly. It needs a company that normalises the upkeep of our mental health. It needs a company that is an emotional support to people. It needs a company that applies science to health treatments in new and inspiring ways. It needs a company that helps us to come together and find common purpose within our community. It needs a company that encourages kindness, caring and empathy. It needs Headspace.
The Headspace team have done an incredible job so far. They have helped millions of people to discover mindfulness, delivered huge social value and built a strong business with massive potential. If they stay true to their mission and make good strategic choices, they will deliver a huge amount of shared value, delivering returns to shareholders and social impact to the world.